Choosing a home loan

When looking for a good deal on a home loan (mortgage), the interest rate matters. A home loan is a long-term debt, so even a small difference in interest adds up over time.

Home loans come with different options and features. These can offer flexibility or let you pay off your loan faster. Some options could cost you more, so make sure they're worth it.

Principal and interest will pay off the loan

Principal and interest loans

Most people get this type of home loan. You make regular repayments on the amount borrowed (the principal), plus you pay interest on that amount. You pay off the loan over an agreed period of time (loan term), for example, 25 or 30 years.

Interest-only loans

For an initial period (for example, five years), your repayments only cover interest on the amount borrowed. You aren't paying off the principal you borrowed, so your debt isn't reduced. Repayments may be lower during the interest-only period, but they will go up after that. Make sure you can afford them. See interest-only home loans.

Get the shortest loan term you can afford

Your loan term is how long you have to pay off the loan. It impacts the size of your mortgage repayments and how much interest you'll pay.

Aim for the lowest interest rate

An interest rate even 0.5% lower could save you thousands of dollars over time.

Check the average interest rate

Weigh up the pros and cons of fixed and variable interest rates to decide which suits you.

Fixed interest rate

A fixed interest rate stays the same for a set period (for example, five years). The rate then goes to a variable interest rate, or you can negotiate another fixed rate.

Pros:

Makes budgeting easier as you know what your repayments will be.

Fewer loan features could cost you less.

Cons:

You won't get the benefit if interest rates go down.

It may cost more to switch loans later, if you're charged a break fee.

Variable interest rate

A variable interest rate can go up or down as the lending market changes (for example when official cash rates change).

Pros:

More loan features may offer you greater flexibility.

It's usually easier to switch loans later, if you find a better deal.

Cons:

Makes budgeting harder as your repayments could go up or down.

More loan features could cost you more.

Partially-fixed rate

If you're not sure whether a fixed or variable interest rate is right for you, consider a bit of both. With a partially-fixed rate (split loan), a portion of your loan has a fixed rate and the rest has a variable rate. You can decide how to split the loan (for example, 50/50 or 20/80).

Mortgage features come at a cost

Home loans with more options or features can come at a higher cost. These could include an offset account, redraw or line of credit facilities. Most are ways of putting extra money into your loan to reduce the amount of interest you pay.

Weigh up if features are worth it

For example, suppose you are considering a $500,000 loan with an offset account. If you're able to keep $20,000 of savings in the offset, you'll pay interest on $480,000. But if your offset balance will always be low (for example under $10,000), it may not be worth paying for this feature.

Avoid paying more for 'nice-to-have' options

When comparing loans, consider your lifestyle and what options you really need. What features are 'must-haves'? What are 'nice-to-haves'? Is it worth paying extra for features you may never use? You may be better off choosing a basic loan with limited features.

Work out what you can afford to borrow

Be realistic about what you can afford. If interest rates rise, your loan repayments could go up. So give yourself some breathing room.

Ticking different boxes on the website, they look at loan options to see how the cost varies. Given interest rates are low, they decide to go with a variable rate. Plus they want to be able to make additional repayments. Using these as filters, they review loan options.

They repeat the process with another comparison website.

Then, using the mortgage calculator, they compare the impact of different interest rates over 25 years.

Based on their research, they shortlist loans from two lenders. They approach each lender to get a written quote personalised for their situation, then choose the best loan.

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